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SEC charges Florida payday lender with making fraudulent misrepresentations in offering
On September 27, the SEC filed charges against a Florida-based payday lender and its CEO (collectively, “defendants”) for fraudulently raising more than $66 million through the sale of promissory notes to hundreds of retail investors, including members of the South Florida Venezuelan-American community. The SEC charges the defendants with falsely promising investors that their money would be used solely to make small-dollar, short-term loans and for associated costs. However, the defendants allegedly misappropriated roughly $2.9 million for personal use, transferred approximately $3.6 million to family and friends without an apparent legitimate business purpose, and used at least $19.2 million of investor funds to make Ponzi-like payments to other investors. The complaint further contends that the defendants mislead investors by promising high annual returns and representing that the business was profitable, and made misrepresentations about the safety and security of the promissory notes. The SEC’s complaint alleges violations of the registration and antifraud provisions of the federal securities laws, and charges the CEO with acting as an unregistered broker. The complaint seeks a permanent injunction against the defendants, disgorgement with prejudgment interest, civil penalties, and an officer and director ban against the CEO.
CFTC announces more than $2.5 million in fines for swap data reporting violations
On September 29, the CFTC announced a $1.5 million settlement with a non-U.S. provisionally registered swap dealer headquartered in France to resolve claims that it failed to comply with certain swap dealer reporting requirements. Among other things, the swap dealer allegedly failed to meet mid-market mark disclosure requirements for numerous swaps, failed to accurately report certain swap valuation data to a swaps data repository, and did not diligently perform its supervisory obligations related to these disclosures. In addition to the civil monetary penalty, the swap dealer must cease and desist from further violations of the Commodity Exchange Act and CFTC regulations and must continue its remediation efforts.
Earlier, on September 27, the CFTC announced a $1 million civil monetary penalty to resolve allegations that a global financial institution violated swap data legal entity identifier (LEI) reporting requirements as well as related supervision responsibilities. According to the CFTC, the alleged failures violated the cease and desist provision of a 2017 CFTC order, in which the CFTC found that the financial institution, among other things, failed to report LEI swap transaction data or establish systems and procedures to do so, did not correct errors in previously reported LEI data, and failed to diligently perform its supervisory duties when reporting LEI swap data. The 2017 order imposed a $550,000 civil monetary penalty and required the financial institution to cease and desist violating CFTC regulations. The CFTC’s September 27 order further found that the financial institution’s alleged continued reporting failures occurred, in part, from a failure to diligently supervise its swap dealer activities with respect to LEI swap data reporting.
SEC claims principals misled investors about subprime auto loans
On September 23, the SEC filed a complaint against two former principals of a subprime automobile finance company for allegedly misleading investors about certain subprime auto loans. According to the SEC, the defendants made false and misleading statements and engaged in deceptive conduct concerning the company’s servicing practices in connection with a $100 million offering backed by a pool of subprime auto loans. The SEC alleged that the defendants took measures to artificially inflate the value of the collateral underlying the offering, such as by (i) including poorly-performing and delinquent loans that were disguised to appear to be performing better than they really were; (ii) applying “fake borrower payments” to delinquent loans; and (iii) extending terms on delinquent loans without contacting the borrower to disguise how far behind the borrowers were on payments. Because of these improper practices, the SEC claimed that servicing and performance information provided by the company to investors at the time of the offering and later on was false. The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, and seeks permanent injunctions, officer and director bars, disgorgement with prejudgment interest, and civil penalties.
SEC enters $19 million FCPA settlement with advertising company
On September 24, the SEC announced that a London-based advertising company agreed to pay over $19 million to settle the SEC’s claims that the company violated the anti-bribery, books and records, and internal accounting controls provisions of the FCPA and the Exchange Act. According to the SEC, the company “through intermediaries, paid as much as a million dollars in bribes to Indian officials to obtain and retain government business, resulting in over $5 million in net profit from 2015 – 2017.” In addition, the company allegedly benefited from other illicit schemes at its subsidiaries such as: (i) “a subsidiary in China making unjustified payments to a vendor in connection with a Chinese tax audit, resulting in significant tax savings to [the company’s subsidiary]”; (ii) “a subsidiary in Brazil making improper payments to purported vendors in connection with government contracts in 2016-2018”; and (iii) “in 2013, a Peruvian subsidiary funneling funds through other [of the company’s] entities to disguise the source of funding for a political campaign in Peru.” The SEC further alleged that the company “failed to devise and maintain a sufficient system of internal accounting controls necessary to detect and prevent the bribe payments at this Indian subsidiary or properly account for the true nature of payments and income at all four subsidiaries.”
The SEC alleged that the company had knowledge of significant red flags connected to the China subsidiary and its CEO through an internal audit in 2017, which found that the China subsidiary was employing tax avoidance schemes and other significant violations of the company’s internal accounting controls. Then in 2018, a China subsidiary employee informed a regional location officer and the company’s regional tax director in China that the China subsidiary was in the midst of a tax audit and its management may face criminal charges for its tax avoidance schemes. The SEC also alleged that despite a policy that prohibited its companies from paying third parties to assist in obtaining or retaining government contracts without the company’s approval, the “Brazil Subsidiary made improper payments to vendors in connection with securing government contracts at [Brazilian CEO’s] direction.” In respect to the Peruvian subsidy, the SEC alleged that the company “was unjustly enriched by $291,935 as a result of Peru Subsidiary acting as a conduit for a bribery scheme.”
In entering the administrative order, the SEC considered the company’s cooperation and remedial efforts. Without admitting or denying wrongdoing, the company consented to a cease and desist order, and agreed to pay a $8 million civil money penalty and approximately $11.2 million in disgorgement and prejudgment interest.
SEC awards $36 million to whistleblower
On September 24, the SEC announced that it awarded a whistleblower approximately $36 million for providing information and assistance leading to a successful SEC enforcement action, as well as actions by another federal agency. According to the redacted order, the whistleblower voluntarily provided information regarding an illegal scheme to staff at both agencies and met with SEC enforcement staff on multiple occasions. According to the SEC, the SEC's whistleblower program allows individuals who provide critical information to other agencies to be eligible for a related action award if they are also eligible for an award in the underlying SEC action.
The SEC has awarded approximately $1.1 billion to 214 individuals since issuing its first award in 2012.
Massachusetts securities division settles with broker dealer
On September 15, the Massachusetts Office of the Secretary of the Commonwealth, Securities Division (Division) entered into two consent orders with a broker-dealer firm for alleged failure of supervisory and compliance procedures in violation of the Massachusetts Uniform Securities Act. According to one consent order, the firm failed to, among other things: (i) ensure that its agents with Massachusetts customers were registered in Massachusetts; (ii) have adequate policies and procedures in place regarding state-based requirements for supervisors; and (iii) supervise its agents in Massachusetts. The terms of the order require the company, among other things, to cease and desist from future violations of Massachusetts General Laws and Regulations, register its employees, enhance policy and procedures, and pay a $750,000 fine. The second consent order alleged that the firm failed to, among other things: (i) have reasonable policies in place to detect and monitor a broker-dealer agent’s social media accounts; (ii) “reasonably monitor internal communications between and among its registered persons”; and (iii) adequately discipline an employee after gaining knowledge of his personal use of social media in violation of state laws. The order requires the firm to permanently cease and desist from future violations of Massachusetts General Laws and Regulations, employ a third-party consultant to supervise the firm’s practices regarding employee trading and social media usage, conduct an annual compliance review, and pay an administrative fine of $4 million.
SEC sues company for misleading investors
On September 21, the SEC filed a complaint against a Puerto-Rico based company and its two managing members (collectively, “defendants”) in the U.S. District Court for the District of Puerto Rico alleging that they offered and sold to retail investors the opportunity to share the profits of a purported Colombian gold mining operation. According to the SEC, the offering, which was unregistered with the Commission, was part of a fraudulent scheme that raised approximately $2.7 million. The complaint also alleges that one of the members and the company authorized advertisements that promised “exorbitant returns on the investment, and provided investors with false and misleading [decks] that misrepresented the status of the mining operations,” while the other member allegedly signed contracts with investors when he had knowledge that the company’s statements to investors were misleading. The SEC’s complaint alleges violations of the registration and anti-fraud provisions of the federal securities laws, specifically, the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint seeks a permanent injunction against the defendants, a permanent ban prohibiting the defendants’ participation in the issuance, purchase, offer, or sale of securities in an unregistered offering, disgorgement of ill-gotten gains, and civil penalties.
SEC announces first crowdfunding enforcement action
On September 20, the SEC brought its first regulation crowdfunding enforcement action against several entities and related individuals allegedly involved in a fraudulent scheme to sell nearly $2 million of unregistered securities through two crowdfunding offerings. According to the SEC’s complaint, two of the entities issued securities without registering with the SEC, while their principals diverted investor funds for personal use rather than using the funds for the disclosed purposes. These actions, the SEC claimed, violated the antifraud and registration provisions of the Securities Act of 1933 and Securities Exchange Act of 1934. Among other things, the SEC claimed that one of the individuals—“a driving force behind both offerings”—also allegedly concealed his participation in the offerings from the public to hide a past criminal conviction arising from a mortgage fraud scheme out of concern that it could deter prospective investors. The SEC also charged the crowdfunding platform that hosted the offering, and its founder and CEO, with violations of the Securities Act and Regulation Crowdfunding for ignoring red flags about the other defendants. The complaint seeks disgorgement plus pre-judgment interest, penalties, permanent injunctions, and officer and director bars. Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, stressed the importance of full and honest disclosures in these types of offerings: “As companies continue to raise funds through crowdfunding offerings, we will hold issuers, gatekeepers and individuals accountable and enforce the protections in place for all investors.”
SEC issues whistleblower awards totaling $11.5 million
On September 17, the SEC announced whistleblower awards totaling approximately $11.5 million to two whistleblowers who provided information and assistance leading to a successful SEC enforcement action. According to the redacted order, the SEC paid one of the whistleblowers nearly $7 million for being the initial source that led enforcement staff to open an investigation into hard-to-detect violations and for providing subsequent substantial assistance. According to the SEC, the whistleblower also “made persistent efforts to remedy the issues, while suffering hardships.” The second whistleblower, who provided information several years after the investigation was already underway, was paid more than $4.5 million. The SEC noted that the information was particularly helpful as it was based on the second whistleblower’s more recent experience. However, the SEC reduced the award after determining that the whistleblower delayed reporting to the SEC for several years after becoming aware of the wrongdoing.
The SEC has awarded approximately $1 billion in whistleblower awards to 212 individuals since issuing its first award in 2012.
New Jersey, Texas flag company for crypto practices
On September 17, the New Jersey Bureau of Securities (Bureau) announced a cease and desist order against a blockchain-based marketplace company for allegedly selling unregistered securities in the form of interest-earning crypto-asset accounts that raised approximately $14 billion. According to the Bureau, the company funded its cryptocurrency lending operations and proprietary trading partially through unregistered securities sales, in violation of the New Jersey Securities Law. The company allegedly solicited investments by depositing certain eligible cryptocurrencies into investors’ accounts at the company and pooling these cryptocurrencies together to fund its income generating activities, including lending and trading operations. According to the order, the company’s website fails to disclose that its product is not currently registered with any federal or state securities regulator, even though it is subject to such requirements. The Bureau also notes that this is the “second time in less than two months that the Bureau has taken action against a cryptocurrency firm for selling unregistered securities in New Jersey.” (Covered by InfoBytes here.)
The same day, the Texas State Securities Board issued a notice of hearing to determine whether to issue a proposal for decision for the entry of a cease and desist order against the company for allegedly violating the Securities Act by offering and selling securities in Texas without being registered as dealers or agents, among other things.